Saving for something big?
Do you have your eye on something special? Maybe a new car, house or vacation? Or maybe you’re considering leaving a secure day job to work for yourself and want to build a nest egg first. Big expenses require big plans.
1. GET YOUR FINANCIAL HEALTH IN ORDER - FIRST AND FOREMOST
Having your financial health in order before a big purchase is a critical step to reaching your goals. If you have clear picture of where your dollars are going, you have a decent savings set aside and are not struggling with basic needs like food, utilities, clothing and shelter, then you’re probably prepared to start saving for your goal.
What if things are not in order and you have no savings, but you still WANT? I suggest reviewing the tips and techniques in my blogpost, “Living paycheck to paycheck?”. Even if that title doesn’t resonate with you, the article details some good strategies to prepare you for reaching your goal.
Once you know where your dollars are going, your bills are current and your emergency funds are in order, it’s time to see where expenses can be cut back on or re-direct to another bucket, like a special saving’s account. Opening a separate account to hold the funds until you need them is a great way to manage those funds and having them automatically deposited to that account takes the temptation out of spending!
2. WHAT IS THE GOAL AND HOW MUCH DO YOU NEED?
If you’re saving for a mortgage, downpayments on conventional loans are typically 20% but much like your financial situation is unique so is your lending profile. Not every situation requires a 20% downpayment but because it is the preferred method of lending (besides all cash, of course) we will assume that’s your goal. So, what does it look like?
All mortgages have fees. Closing costs, title fees, inspections, taxes, etc. Consulting with a lender ahead of time to see what you can expect is doing your due diligence and reinforces preparation for savings. In this example let’s say the purchase, including all of the aforementioned expenses, is $250,000. A conventional mortgage with 20% down means you need to save $50,000 to close on the loan. That’s equal to or even more than, the annual salary of many.
If you are in a position to set that money aside, first determine an end date. If you plan on buying in 2 years (or 24 months), that means you need to set aside $2,083 a month to achieve your goal. (Remember, there are other programs available that offer lower or no down payment at all, this is just an example.)
$50,000 / 24 months = $2,033
Cars are much different to finance and paying all cash for a vehicle should be your ultimate goal but in reality, the majority of people take out leases or loans. Credit scores drives the percentage of interest you’ll pay so the better your credit, the less the cost of the loan. Likewise, the opposite is true. CLICK HERE FOR MY MORTGAGE LENDERS
Remember that vehicles depreciate so any interest paid is not likely to be regained. In other words, it’s the bank’s cost of doing business and the only benefit to you is time to pay for the car but it most certainly is not savings. CLICK HERE FOR MY AUTO LOAN CALCULATOR AND AMORTIZATION CHART (Meaning the amount it will cost you over the total life of the loan.)
3. LONGING FOR A TROPICAL GETAWAY?
Many times, vacations can be paid in installments but unless those installments are interest free, I don’t recommend it. Why? Because a vacation is a want, not a need.
SIDE NOTE: Homes and cars can be wants too, but shelter and transportation are part of the top 4 budget priorities (Food, Shelter, Clothing & Utilities) so I don’t consider them wants unless it’s a second home or you have a house with more cars than drivers and don’t truly need them.
Similar to a Christmas Savings Club, many banks and credit unions offer Vacation Savings Clubs as well and work similarly. A pre-determined amount each pay period is automatically deposited into the special savings account. There’s a set date when the bank will release the funds and they may even be able to help you lock in a rate so costs don’t exceed what you have saved for by the time you are ready to travel.
Premature withdraws come with penalties so there is less temptation to take money out. Wouldn’t it make your vacation much more enjoyable and less stressful if it were already paid for?
IN CLOSING
Regardless of what you’re saving for, the action is the same; Decide how much is needed, set an end date, divide the amount needed by the number of pay periods remaining between the time you start and the end date. Now you have the amount to set aside with each check and will be well prepared to make that big purchase!
I recommend researching and consulting with lenders ahead of time, so you know what to expect as you prepare to reach your saving’s goal.